Construction bonds are a type of surety required by the financial backers of large construction projects. Construction bonds are also required for federal construction projects. These legal documents help to protect project owners from a contractor who fails to perform. Although a construction bond is not an insurance it helps to ensure the construction project’s completion.
Construction bid bonds, construction payment bonds and construction performance bonds are the different types of construction bonds. A construction bid bond guarantees the owner that the principal will honor its bid and will sign all contract documents if the contract is awarded. A performance bond guarantees the owner that the principal will complete the contract according to its terms including price and time. A payment bond guarantees the owner that subcontractors and suppliers will be paid the money they are due from the principal. A bid guarantee is required on federal projects whenever a performance bond and/or a payment bond are compulsory. Payment bonds and performance bonds are also required by law for all federal contracts over $100,000. If the bond obligations are not met, the principal and the surety are liable for the bond jointly and severally. There are penalties that apply for failure to comply with bond obligations.
The Miller Act is a federal statute that requires contractors to furnish payment and performance bonds, and other surety bonds, for all federal construction projects. The Act applies to federal contracts exceeding $100,000. The Miller Act has successfully protected the interests of the federal government, taxpayers, and subcontractors and suppliers over the last 70 years. This Act ensures that construction contractors are qualified to perform their contractual obligations to the government.
The Miller Act payment bond covers subcontractors and suppliers of material who have direct contracts with the prime contractor and are called first-tier claimants. Subcontractors and material suppliers who have contracts with a subcontractor, but not those who have contracts with a supplier are also covered and are called second-tier claimants. Anyone further down the contract chain cannot assert a claim against Miller Act payment bond posted by the contractor. Bond underwriters evaluate the capacity, character, and capital of construction firms to determine how much surety credit to extend. The granting of surety credit demonstrates that contractor’s ability to perform. Therefore, Miller Act bond requirements ensure that, when the federal government seeks to procure construction, it will select from a pool of contractors qualified to perform the project. Many states in the U.S. have adapted the Miller Act for use at the state level. These state statutes often referred to as, “Little Miller Acts.”